Why hasn’t the Iran deal depressed oil prices?

First, as Goldman Sachs analyst Brian Singer observed in an email to clients this week, Iran’s oil production collapsed after the 1979 Iranian revolution (from just under 6 million bpd to 1 million bpd in 1980), in part due to war with Iraq. It took Iran more than a decade after the end of the Iraq war to ramp production back up to 4 million bpd. Iran may have a lot of oil sitting in tankers, but it will take years for Iranian production to move the needle in the world supply-demand equation.

Second, as Brookings scholar Daniel Drezner wrote in yesterday’s Washington Post, there are numerous ways in which the Iran nuclear deal–if it is a deal at all–can fall apart between now and June 30. Iran and the West appear to have radically different ideas of what was agreed at Lausanne, to begin with. Republicans (including two respected former Secretaries of State are aghast, and a domestic battle over foreign policy looms that the US hasn’t seen since Vietnam. The regional situation is melting down, and, as Drezner says, “ongoing wars in Yemen, Syria and Iraq are intrinsically bad, but it also makes the administration argument of “this deal or war!” seem slightly less scary.”

Third, and most important, as far as long-term investors are concerned, they already rang a bell at the bottom of the oil market. The equilibrium price of oil may not be $110 going forward, but neither is it $40. Major players like BP are willing to bet their businesses on the idea that oil in the ground is cheap at current prices. At some point long and short-term judgments have to converge.